The Real Cost of Living: An Inconvenient Truth

The main reason, the chief problem, is that life is expensive. Simply put, there’s just very little cash left over once our living expenses are paid.

We come across this all the time. The news and current affairs programs remind us of the skyrocketing prices for this and that.

Even our Reserve Bank (the RBA) tracks how the price of goods and services increases, year after year.

And this is good. We need to track such things. Also, it’s important for us to be aware of how much living costs are increasing.

But what if we’re looking at it the wrong way? What if we’re measuring the wrong things, or we’re missing the bigger picture?

Inflation

Instinctively, most of us know how inflation works – even if we don’t think about it.

For example, a loaf of bread 40 years ago cost around 25 cents, versus $2 or so today.

We’re used to seeing this happen over time. Indeed, we’ve grown to expect it. And not just with bread, with damn near everything.

But what about the stuff that falls in price?

Or more commonly, what about when stuff increases in price, but at a slower rate than our incomes grow?

When this happens, it essentially means we can buy more products and services, for the same portion of our income as before.

Put another way, we have more money left over after purchasing the same things – our purchasing power has increased.

Purchasing Power

Let’s say the cost of living, also known as CPI (Consumer Price Index) as measured by the RBA, is going up at a rate of 2% per year.

Now, let’s say household incomes are also increasing, but at a rate of 3% per year.

So things got more expensive, sure. But our earnings went up slightly faster – meaning our purchasing power has increased. We actually have more disposable income than before.

In this scenario, our standard of living has increased – to use the proper term.

When this occurs, it gives us more money to spend, save or whatever we please. And to be clear, this is precisely what’s been happening over the past 100 years.

As we’ve become more productive and efficient over time, using the power of technology, it means we can now produce things much faster, with far less cost.

Also, international trade has meant we can import things that were made in low-wage countries, increasing our purchasing power – our wage stretches even further.

Again, most of us realise this has occurred over time, whether we think about it or not.

So how does our cost of living compare historically? And how much have our wages gone up in comparison?

History of Household Spending

Since most of the Western developed countries have similar living standards, we can cheat a little and look at this US study.

The study shows history of consumer spending for American households from 1900-2003. We can be fairly certain that roughly the same factors have played out here in Australia.

In 1900, many citizens were farmers and lived on the farm they worked at. They spent roughly 80% of their income on food, clothing and very basic housing costs. Only a fraction had gas or electricity, not to mention flushing toilets.

The category for ‘other’ spending was roughly 13% of their wage. My best guess is, that’s what was leftover for discretionary spending.

Yes, it’s hard to relate. These folks didn’t live like us. They weren’t trying to buy an affluent-suburban apartment. Food costs didn’t include ‘super-food’ snack bars, lattes or smashed avo.

This is what it cost them to survive, with some small level of comfort.

Regular workers didn’t have cars. Nobody had a smartphone. Hell, no-one even had a TV!

Fast forward to 1950…

With growing technology, the use of better machinery helped make many industries more productive and efficient. And becoming more productive lead to wage increases.

Because of this, the cost of food was covered by a smaller chunk (30%) of wages, compared to before (40%).

Interestingly, the ‘other’ spending category grew to 21% – in line with the increasing prosperity and living standards of the workers.

End of study (2003)

The study concludes, with food and clothing costs now only chewing up 17% of incomes, compared to 57% in 1900!

We’re spending much more now on housing and transport than decades prior.

And notably, the ‘other’ category now makes up 39% of spending. I find that very interesting.

Is it any coincidence we now drive around in super-sleek SUVs, and live in homes with 210% more space per person than 100 years ago.

Not to be outdone, Australians have even bigger houses than the yanks – the biggest in the world in fact! Dwelling size has more than doubled over the past 60 years, despite less people living in them – household sizes have been shrinking for the last 100 years!

Safe to say, we’re living a lot larger and fancier, than our ancestors were.

Average Australian Wages vs Inflation

Now, let’s look at an Aussie example. Instead of going back 100 years, we’ll just go back 50 years. Hopefully that makes it more relatable. And that’s all the data I could find anyway!

Using this RBA Inflation Calculator, we can determine that inflation over that 50 year period averaged 5.2%. This means the cost of living grew roughly by this much on average, each year, over that time.

By using a compound annual growth calculator, we can measure the growth in incomes over that time. Turns out that the average wage grew 6.7% per annum over the last 50 years, a fair bit quicker than the cost of living.

Or another way, the average weekly wage in 1966 is the equivalent of $758 today, if wages just grew with inflation.

Effectively, real wages and our purchasing power is double what it was 50 years ago!

Yay, instant 50% savings rates for everybody right!? Hmm, not quite.

This is what they call an increasing standard of living. We have twice as much income now, even after adjusting for inflation. So why aren’t we rich?

Yes, things cost a lot more now. But remember, our wages have grown even faster!

So it begs the question – where’s the money? Where the hell has it gone?

Our Short Memory

If you’ve had a think about it, you’ll realise we all live much differently to decades past.

Consumerism took off (we bought more shit). We live in bigger, fancier homes. We drive luxurious, computerised cars. Almost everyone can afford international travel. We have $50k celebrity-like weddings. We have ridiculously futuristic mobile phones, with the equivalent of $900k worth of features. We’re addicted to take-away coffee, outsourcing much of our cooking and the national sport is online shopping.

In short, our lifestyles got a whole lot frickin’ fancier!

It’s pretty clear we’re not just surviving with some comfort anymore.

In fact, the comfort level has been pumped full of steroids, filled with hot air and shot out of a cannon, heading for the moon!

So we find ourselves living this modern life, that nobody could even imagine 50 years ago.

This is lifestyle inflation at it’s core. And unfortunately, we tend to have very short memories. We don’t even realise it’s happening. Well, maybe some of us do.

Also, let’s be clear, I’m not hating on anyone for enjoying the good life. I enjoy it too. But I see it a little differently.

All this data is actually telling us something wonderful. Basically, once we cover all our basic living costs (surviving in comfort) we should have a mountain of cash left over!

I’ve experienced this on multiple occasions. Often, I’ll procrastinate over something small like which colour shirt to buy or what to have for lunch, until eventually I’m so tired of thinking about it, that I don’t want anything!

It’s not an important choice. But with all the options available, it just becomes paralysing and exhausting.

So it’s been found, people tend to be happier with a few choices, but not too many!

Back to our inconvenient truth…

So we’ve discovered our basic living costs are much, much cheaper than they used to be. And we have a monstrous amount of disposable** income that we never used to have!

Unfortunately, the supposed high cost of living doesn’t exist. In fact, it’s simply the cost of high living – that is, maintaining a certain elevated lifestyle.

Nobody wants to admit that. But it’s true. We just have a very short memory and such little appreciation for how people used to live. And we rarely talk about how much our lifestyles have changed over time.

We prefer to deny it. To find excuses and holes in the data. Because if we admit it, then we become solely responsible for our own situation.

It’s much easier to blame our money problems, mountain of bills and a lack of freedom on our stingy boss, the government or greedy corporations.

If it’s someone else’s fault, then we don’t have to do anything. We don’t have to change our poor financial habits or behaviours. Instead, we get to continue our affluent lifestyle, with a ‘poor-bugger-me’ victim mentality.

The common mantra that is peddled by the media goes something like this: “It’s so hard to save. Aussie’s are doing it tough. Life is expensive. And the cost of living is going through the roof”.

Well, I call bullshit on that!

They peddle this message for one reason. Because it’s exactly what people want to hear. They want to hear it’s hard. It massages their victim mentality juices.

But unfortunately for them, the data shows this is flat out wrong.

Yes, power prices might be much higher one year. Yes, petrol might be through the roof the next year. But we never hear about the stuff that’s getting cheaper, do we?

The bottom line is: on average, and over time, our wages have far outstripped our basic living costs. We’ve just decided (subconsciously) that our standard of living needs to stay on some permanently-upward escalator.

Take charge

Hopefully, you’ll see that by succumbing to this thinking, we’re just lying to ourselves.

Becoming financially independent is about taking full responsibility. It’s about owning your decisions and taking massive action. It’s doing whatever is necessary to create the freedom and space we want, to work and live as we please.

It means no excuses. And designing our happy, low-cost lifestyles one piece at a time. Not just passively rolling with the herd and accepting the victim mantra.

Our Choices

Every single day, with every choice we make, we’re creating our own future freedom. Or not.

If anything, this should be empowering. Never at any time in history have we had this much income. Never have our basic needs cost so little.

100 years ago, people had little choice to save for financial independence. They needed the vast majority of their income to stay alive. Now, we need just a portion of our wage for the same thing. The rest is up to you.

We’re not owed or entitled to a certain elevated standard of living. We’re very fortunate to be living at this time in history, and in a rich Western country like Australia.

You can choose to seize the opportunity for financial independence that only a small piece of the world gets. Or, choose to join the mindless world of consumption-driven excess, and the self-imposed job slavery that comes with it.

It doesn’t matter that much what we choose. As long as we recognise that we are choosing.

Beating inflation, 3 times over

Here’s where it gets fun.

Now, it’s your chance to give inflation the finger! And in doing so, reap the substantial savings that gives you the ability to invest for financial freedom.

There’s three chances you get to beat inflation and come out ahead. And they’re all very doable.

Ladder Climbing/Bonuses/Experience/Skills.

As we climb the ladder, increase our skills or progress in our job – our level of salary usually increases with it. So in this scenario, our salary will get a nice bump every few years or so.

Of course we’ll be investing that extra cash for our future, instead of upping our spending.

This is the most common pay-rise we’re used to. As we become more efficient over time as a species, producing more with less time/cost, we will likely receive wages that grow slightly faster than the cost of living.

Just like whats occurred for the last 100 years. But unlike the population up to this point, you’ll be saving that extra bit each year won’t you?

Beating the RBA Bucket.

As I said earlier, the RBA tracks the change in price for a given basket of goods and services.

According to their own paper, the CPI inflation measure usually overstates actual inflation experienced by households. Because it’s a fixed basket, as prices change they assume our behaviour stays the same. But when we optimise our spending as prices change, we actually experience much lower inflation than is assumed.

Also, the basket is adjusted every few years or so, to become more relevant. As there’s widespread adoption of newer products, services and generally fancier stuff, it becomes included in the prices they track.

Clearly, once we realise how damn good we’re living already, it’s not hard to imagine our lives being fine the way they are into the future. We don’t need to constantly upgrade our lifestyle to enjoy life!

During our journey, we practised these 3 ways to beat inflation and continually increase our savings rate. And by regularly assessing our cost of living, we’ve managed to avoid inflation overall, for the last 10 years.

Since you’re reading this, you’re probably aiming to retire early. But what you’re really trying to do, is beat the system. Think of it like a game.

Learn the rules and strategies, play the game smart and you could be financially independent in 10 years or less!

So what now?

Look, I’m not saying you have to sit in a dark room and eat a bowl of rice each day. But just recognise that for every handbag, $14 pub beer, holiday and car payment…there’s a cost.

You’re not just spending your money, you’re spending your freedom.

Seems to me, that we have much to gain by looking back and putting the current excess in the context of history, and the world. And from there, we can still enjoy our rich modern lives as long as we just tone that shit down a bit!

For the more hardcore folks, one way to approach it is to start from scratch. Yes, design your life from zero. Scale it up one worthwhile thing at a time, with a focus on what truly makes a human happy. You’ll realise you’ll be just as happy (if not happier) with a scaled down version of a fancy modern life!

Our thinking was, we can scale down and simplify our lifestyle and see if we’re still happy. And we are!

Then, once we reach financial independence we can always scale it back up later, from our position of strength, rather than have everything now with no alternative but to work forever.

So far, scaling back up doesn’t really interest us. And strangely, we’re much more satisfied with our lives than before.

I’m developing the unpopular opinion that inflation can actually be optional. As the basics become cheaper over time, there’s little reason a frugal households cost of living will increase by much at all, if they so choose.

The point is, it’s much more controllable than we think. And we have more power than is assumed.

Final Thoughts

So there we have it. The inconvenient truth about the real cost of living. At least, from my perspective.

Now, I know it’s not what people want to hear. But it definitely needs to be said. And yet, I rarely see it mentioned anywhere.

It’s just a shame the drama-hungry media will only tell you about one or two outrageous price-hikes each year. And pandering to the victim mentality, despite the proof of our continually-growing prosperity.

If we’re brutally honest with ourselves, we know the true basic cost of living is very low. And it’s dramatically cheaper now, with our modern-day incomes.

You make a very compelling case. I’m with you on the media – I absolutely can’t stand those headlines about the cost of living ‘pressures’, like no-one has a choice! Would be great to hear more about this perspective in the media instead.

Even for the big earners, expensive housing and private school fees in particular seem to have become the new necessities that soak up a large part of that disposal income, no matter how high the costs get…

Haha that’s not going to happen, because people will become so outraged that at the lack of sympathy if we tell them ‘hey stop whinging, look how good you have it’. This article would be shot down, set on fire, holes poked in it with a barrage of angry comments on a mainstream media site. Would be funny to see though!

It’s a very emotional topic, because you’re basically telling people they suck at running their own life, financially speaking. I don’t mind so much if everyone admits their expenses are their choice. But I can’t accept playing the victim, palming-off responsibility and saying they have no alternative options.

That necessity list just keeps growing. Our ‘needs’ and ‘wants’ have become blurred to the point where people think they’re the same thing.

“I don’t mind so much if everyone admits their expenses are their choice.” Whew, I’m glad you said this. We fall into the “why are we spending so much money?!” camp, but you can see from our 2018 goals post – it’s quite simply because we don’t want to do what it takes to spend less. And there’s the phrase: want. We ARE making deliberate choices. We choose to have 2 cars and a motorbike. We choose to feed our cats premium food. We choose to spend a ridiculous amount on spending money. All I can hope is that we slowly work to change our mindset, so those choices become less important compared to FI.

i believe it a also easier to do in early years. you tend to wish for more comfort as you grow old.

one strategy used is to live in the past: technology and human advancement s growth pace is insane and if you can start by just delaying joining everyone by a few years on embrassing technology you will gain YEARS in FIRE.

That’s probably true. At least if you keep things toned down in the early days, you can much more afford to scale it up later if you prefer.
Yeah well said mate, that’s my point – even a simpler version of modern life is still ridiculously good 🙂

I wish I read this 10 years ago! I was earning less but spending way more. Oh well, the best time was then and the second best time is now. I’m no longer making excuses and feeling as if I deserve a ‘nicer’ life, I’m happy to keep things simple and I’m still just as happy (if not more).

I’d love it if you put together a similar sort of comparison on the rising cost of buying a house? It is a super hot topic, especially here in Sydney at the moment and I’d love to know what the numbers over time really say. Have wages risen at the same rate as housing prices? I find even a small apartment to be too much to justify buying 35km from the city, but unfortunately, that’s where the jobs are. I often wonder about the long term viability of renting (especially now with our landlord selling and us having to look for a new place asap) but that’s probably a whole other post again haha.

Appreciate you sharing. It’s interesting you say that, I much prefer our simple life these days too.

Haha yes, it would be possible to do that, but I’m not sure I could give much input on it. Here’s my thoughts on it…

The simple fact is that prices have definitely grown faster than wages, BUT, sevricing mortgage repayments is roughly the same if not cheaper because of interest rates declining. The catch is the deposit + stamp duty is now higher. But overall, it’s not drastically different. Still a 30 year mortgage is serviceable by many, even though the numbers are bigger.

It’s a tricky situation. If you plan on living there (in a particular property) for a long time, it probably does make sense to buy at some point (if you feel the need). But I definitely don’t think you end up worse off long term financially by renting, as some assume. If someone is investing all that extra cash, they’ll be better off later and can even buy a property with cash by selling off some investments.

What do you mean by the long term viability of renting? Whether it’s enjoyable long term?

Fair point, I agree I could service the mortgage, but getting the 25% (deposit + stamp duty & fees) seems like too much (eating an elephant analogy comes to mind). That’s why I’m renting and investing the rest in shares for the moment. I’m not sure I want to live here long term, especially when raising a family and even longer in the future to retirement, so eventually, a place in an area I’d like to settle would be good.

Long term I meant more around rent rising and earning going down or stopping in retirement. Perhaps I was more thinking about pensioners at the moment and how many of them are living week to week as their pension payment is taken up by mostly rent. I guess that’s what FI is all about, making sure you aren’t in that situation. I’ve still got many years ahead.

Deposit hurdle is a biggie. But one can also buy with a smaller deposit, I think 15% or so and you don’t have to pay LMI. Even still, if you bought with smaller deposit, adding LMI to the loan will mean more interest long term, but not much difference in repayments (cashflow) which I think is probably the most important part.

That’s a good idea Miss B. Transaction costs are so high, it’s a killer and some people don’t even realise it. I know a couple who have had a mortgage for 40 years and still have it now because they’ve moved so many times. This is despite their income going way way up over the decades. Essentially if they stayed where they were they would have paid the equivalent of 2 or 3 houses off by now. And for some sad reason they think they’ve done well out of property because the price of the house has gotten higher over time.

Oh pensioners no doubt have it harder if they’re renting, especially in a capital city. That’s why we should do all we can to ensure we can fund our own retirement 🙂